Federal Reserve Credit $bn last week to $2.1 TN. Fed Credit has declined $9bn
y-t-d, although it expanded $28bn over the past 52 weeks (15%). Elsewhere,
Fed Foreign Holdings of Treasury, Agency Debt this past week (ended 11/4) $bn
to a record $2. TN. "Custody holdings" have expanded at an 18.% rate y-t-d,
and were up $41bn over the past year, or 16.%.

Total Commercial Paper outstanding dropped $61.7bn (12-wk gain of $241bn)
to $1.315 TN. CP has declined $366bn y-t-d (26% annualized) and $285bn over
the past year (18%). Asset-backed CP fell $28.0bn last week to $515bn, with
a 52-wk drop of $217bn (30%).

International reserve assets (excluding gold) - as accumulated by Bloomberg's
Alex Tanzi - were up $689bn y-o-y to a record $7.489.9 TN. Reserves have increased
$725bn year-to-date.

Global Credit Market Watch:

November 3 - Bloomberg: "The widening yield spread between China's bills at
auction and in the secondary market shows investors are speculating the central
bank is set to tighten monetary policy, China International Capital Corp. said.
'China is seeing a return of inflation,' said Xu Xiaoqing, a bond analyst in
Beijing at CICC... 'A resumption in the increase of bill yields during auctions
would indicate the central bank has switched to a 'neutral' from a 'loose'
policy to control inflation expectations.'"

November 5 - Bloomberg (John Glover): "The global speculative-grade default
rate rose to 12.4% in October, surpassing the record set in 1991 for the highest
proportion of defaults since the Great Depression, according to Moody's..."

Global Government Finance Bubble Watch:

November 6 - Bloomberg (Gonzalo Vina and Emma Ross-Thomas): "U.K. Chancellor
of the Exchequer Alistair Darling said the Group of 20 nations should develop
a way to tackle asset-price bubbles as the world's leading economies recover.
'We have got to make sure we don't get ourselves into a situation where some
pressure starts to rise and then it becomes bigger and bigger and when the
whole thing comes to an end it has catastrophic consequences,' Darling said..."

November 3 - Bloomberg (Jon Menon and Andrew MacAskill): "Royal Bank of Scotland
Group Plc and Lloyds Banking Group Plc will receive 31.3 billion pounds ($51
billion) in a second bailout from the U.K. taxpayer in return for putting a
cap on bonuses. The Treasury will inject 25.5 billion pounds of capital into
RBS, for a total of 45.5 billion pounds, making it the costliest bailout of
any bank worldwide. The government will fund about a quarter of Lloyds's 21
billion-pound fundraising... The rescue will bring the government closer to
full ownership over RBS, while Lloyds will escape government control."

November 5 - Bloomberg (Jennifer Ryan): "The Bank of England raised its bond-purchase
plan by 25 billion pounds ($41 billion), the third increase since March, as
policy makers try to cement Britain's recovery from its longest recession on
record. The nine-member Monetary Policy Committee, led by Governor Mervyn King,
today raised the amount of bonds it will buy with newly created money to 200
billion pounds."

Currency Watch:

November 4 - Bloomberg (Juan Pablo Spinetto and Alexander Kwiatkowski): "Crude
oil, which has risen 80% this year, is causing the U.S. dollar to weaken, driving
metals and other commodities higher, according to Jeffrey Currie, head of commodity
research at Goldman Sachs... While oil has risen, the U.S. currency has weakened,
leading to speculation that the dollar's depreciation is driving investors
to buy oil as an inflation hedge, thereby pushing up the price of crude. 'I
would argue the other way,' Currie said... 'I would argue that higher oil prices
drive the dollar down and then the weaker dollar drives the metals and soft
commodities up...Oil represents 40 to 50% of the U.S. current account deficit,
so a higher oil price represents an outflow of dollars that pushes the currency
lower..."

November 5 - Bloomberg (Anil Varma): "The dollar...will slide further as nations
that hold the world's biggest reserves seek 'safer' assets including gold,
BNP Paribas SA said. ...China, Japan, India and Russia, four of the five biggest
foreign-exchange reserve holders, raised gold stockpiles to record levels this
year... India paid $6.7 billion to buy 200 tons of gold from the International
Monetary Fund... China said in April it has boosted reserves of the metal by
76% since 2003. 'The Reserve Bank of India's gold purchase seems to be part
of a broader, global theme of central banks worldwide seeking a stronger, safer
alternative to the dollar to park their reserves,' Manoj Rane, treasurer in
Mumbai at BNP Paribas, France's biggest bank, said... 'This trend will only
feed the dollar's weakness.'"

The dollar index declined 0.7% to 75.75. For the week on the upside, the South
African rand increased 3.7%, the Brazilian real 2.4%, the Australian dollar
2.0%, the Swedish krona 1.4%, the South Korean won 1.3%, the Canadian dollar
1.0%, the British pound 1.0%, the New Zealand dollar 1.0%, the Swiss franc
0.9%, and the Euro 0.9%. On the downside, the Mexican peso declined 1.6%.

Commodities Watch:

November 3 - Bloomberg (Thomas Kutty Abraham and Kim Kyoungwha): "India,
the world's biggest gold consumer, bought 200 tons from the International Monetary
Fund for $6.7 billion as central banks show increased interest in diversifying
their holdings to protect against a slumping dollar. The transaction, equivalent
to 8% of world annual mine production, was the IMF's first such sale in nine
years and propels India to the ninth-biggest government owner globally... 'The
fall in the U.S. dollar seems to be pushing all the central banks to strengthen
their portfolio with gold,' said N.R. Bhanumurthy, professor at the National
Institute of Public Finance and Policy in New Delhi. 'Gold is a safe store
of value compared to the U.S. dollar.'"

November 4 - Bloomberg (Claudia Carpenter): "India's purchase of 200 metric
tons of gold in two weeks was more than total European central bank sales last
year, a sign that central banks may be looking to diversify their assets as
the dollar slides. 'This could be the beginning of a sea change in central
bank sentiment about what they hold,' said James Moore, an analyst at TheBullionDesk.com...
'The perception of gold compared to five or 10 years ago has changed completely.'"

November 3 - Reuters: "New bank lending in China may have hit 300-400 billion
yuan ($44-59 billion) in October, the Shanghai Securities News reported...
The newspaper cited unnamed bankers who based the estimate, which is lower
than the 516.7 billion yuan total in September, on a reported rise in new lending
by the country's biggest banks. Lending by the four biggest banks 'clearly
recovered' in October, climbing to 136 billion yuan from 110 billion yuan in
September, the official China Securities Newspaper reported."

November 4 - Bloomberg: "China's policy makers must avert stock and property
market bubbles after lending swelled to a record $1.27 trillion this year,
the World Bank said. The... lender raised China's economic growth forecast
for this year to 8.4% from 7.2% and Beijing-based senior economist Louis Kuijs
said the central bank will "eventually" have to rein in credit to ensure resources
are properly allocated."

November 5 - Bloomberg: "China should avoid pursuing 'excessive growth' so
that the nation can keep inflation under control as the economy recovers, said
Yao Jingyuan, the statistics bureau's chief economist. 'China can keep inflation
in check if we avoid chasing excessive growth in the fourth quarter and in
2010," Yao said... 'Now that China's growth rate is assured, we should put
more of our resources into rebalancing and restructuring China's economy.'"

November 5 - Bloomberg (Chia-Peck Wong and Kelvin Wong): "Jian Sihua is counting
on the Hong Kong government to create an opening for him in a property market
where prices have climbed 28% this year. The 39-year-old marketing professional
said he was 'too slow' at the start of the year when prices started surging
and was 'squeezed out' by speculators, including rich mainland Chinese. The
jump in prices has sparked a public outcry over housing costs, increased pressure
on Hong Kong's government to increase land supply and this week prompted the
International Monetary Fund to warn of a possible bubble. Financial Secretary
John Tsang responded yesterday by saying the government was 'very concerned'
about the 'sharp' rise."

November 6 - Bloomberg (Seyoon Kim): "South Korea's government plans to add
as much as $7 billion next year to Korea Investment Corp., the nation's sovereign
wealth fund... Next year's addition would increase the fund's size to $37 billion..."

Latin America Bubble Watch:

November 3 - Dow Jones: "Brazil's foreign currency reserves reached a new
monthly record in October on persistent government purchases of U.S. dollars...
Brazil's foreign reserves totaled $232.9 billion at the end of October, up
from $224.2 billion at the end of September. In the first ten months of 2009,
reserves were up $26.1 billion. Reserves ended last year at $206.8 billion."

November 3 - Bloomberg (Helder Marinho and Andre Soliani): "Brazil's industrial
output fell 7.8% in September from the year-ago month..."

Unbalanced Global Economy Watch:

November 4 - Bloomberg (Katya Andrusz): "The credit outlook for Poland's banking
system remains negative as the operating environment worsens, Moody's... said.
'We expect the negative trends apparent in the first half financials of most
of the rated Polish banks to persist into the next forecasting period," Irakli
Pipia, Moody's lead analyst for the Polish banking system, said..."

November 6 - Bloomberg (Josiane Kremer): "Norway's biggest industry group
warned the krone's 7.2% advance against the euro since July is eroding profits
at manufacturers... 'Norwegian industries may have the worst time ahead of
them," Dag Aarnes, senior economist at the Confederation of Norwegian Business
and Industry, said..."

November 6 - Bloomberg (Jacob Greber and Jason Scott): "Australia's central
bank said the nation's economy will expand at more than three times the pace
forecast in August, and signaled it will continue to lead the world in raising
interest rates... Gross domestic product will rise 1.75% this year and 3.25%
in 2010, the bank said."

November 5 - Bloomberg (Tracy Withers): "New Zealand's unemployment rate rose
to the highest level in more than nine years... The jobless rate increased
to 6.5% from 6% in the previous three months..."

U.S. Bubble Economy Watch:

November 3 - Bloomberg (Kathleen M. Howley): "Kajal and Vishal Dharod paid
$559,000 in 2006 for a new four-bedroom house built in Rancho Cucamonga, California.
Today, it's worth about $360,000. 'We don't know how we can come back from
a loss like that," said Kajal Dharod, 29, a first-time homeowner with a $4,200-a-month
mortgage. 'Buying the house was a mistake.' American homeownership, once considered
a path to wealth, is now leading to disillusionment."

November 2 - Bloomberg (Oliver Staley): "Shirley Ann Jackson, president of
Rensselaer Polytechnic Institute, was the highest paid leader of a U.S. private
college in fiscal 2008, before the financial crisis prompted Jackson and others
school leaders to freeze or lower their salaries. Rensselaer... Paid Jackson
$1.6 million in salary and benefits in the year ending June 30, 2008... Presidential
compensation rose 6.5% to a median of $358,746 in fiscal 2008."

MBS/ABS/CDO/CP/Money Fund and Derivatives Watch:

November 5 - Bloomberg (Pierre Paulden): "Rising prices of collateralized
loan obligations may signal higher fees for managers of the securities such
as Highland Capital Management LP, Aladdin Capital Holdings LLC and KKR & Co.
and spur loan sales, according to strategists. The lowest-rated pieces of CLOs,
which pool high-yield, high-risk loans and slice them into securities of varying
risk, have climbed to 30 cents to 40 cents on the dollar from less than 10
cents seven months ago, according to Morgan Stanley. Those ranked BBB have
risen to 59 cents from 6 cents on the dollar in the past six months."

Real Estate Watch:

November 5 - Bloomberg (Dan Levy): "Stores, apartment buildings and warehouses
in the U.S. will set new vacancy records before a recovery takes hold in the
job and commercial property markets, according to a forecast by CB Richard
Ellis... Vacancies at industrial properties will climb to almost 16% in 2011
and apartment vacancies will top out at 8.1% this quarter, CBRE chief economist
Ray Torto said... The proportion of empty space at shopping centers and malls
will increase to about 13% in 2010... U.S. commercial real estate prices have
plunged almost 41% since October 2007, the Moody's/REAL Commercial Property
Price Indices show."

November 5 - Bloomberg (Brian Louis): "U.S. mortgage lending for commercial
property fell 54% in the third quarter from a year earlier... the Mortgage
Bankers Association said. The dollar value of loans dropped 56% for office
properties and 40% for apartment buildings... Loans for malls and shopping
centers fell 62% and hotel loans declined 46%. The credit crisis has driven
$138 billion worth of U.S. commercial properties into default, foreclosure
or debt restructuring, according to... Real Capital Analytics Inc."

Central Banker Watch:

November 3 - Bloomberg (Jacob Greber): "Australia raised its benchmark interest
rate by a quarter percentage point for the second straight month, becoming
the only nation to increase borrowing costs twice this year as the global economy
recovers. Reserve Bank Governor Glenn Stevens lifted the overnight cash rate
target to 3.5%..."

November 6 - Bloomberg (Brian Swint and Jennifer Ryan): "The world's biggest
central banks are starting to unwind emergency measures introduced earlier
this year to stave off a second Great Depression. The euro rose after European
Central Bank President Jean- Claude Trichet yesterday said his bank will withdraw
some liquidity operations, and the pound climbed after the Bank of England
slowed the pace of bond purchases... 'There are all kinds of risks,' said Jim
O'Neill, chief global economist at Goldman Sachs... 'We don't know how much
of the improvement in markets is due to central banks' largesse, and neither
do they. They're pretty nervous, but they've got to get out of it at some stage.'"

November 5 - Bloomberg (Brian Swint): "Europe's biggest central banks signaled
they will start to wind up emergency policies introduced to fight the financial
crisis as the global economy recovers. European Central Bank President Jean-Claude
Trichet said today the ECB plans to phase out its unlimited liquidity operations
next year, and Governor Mervyn King's Bank of England said U.K. officials will
slow the pace of bond purchases. Central banks around the world are starting
to rein back some of the measures introduced to stave off a second Great Depression.
Australia and Norway have already raised interest rates..."

GSE Watch:

November 5 - Wall Street Journal (Nick Timiraos): "Fannie Mae plans to allow
homeowners facing foreclosure to stay in their homes and rent them for up to
one year as part of the latest effort to help troubled borrowers while keeping
a glut of foreclosed properties from hitting the housing market. The Deed for
Lease Program... will offer borrowers who fail to complete or don't qualify
for a loan modification or other workout to deed their property to the lender
in exchange for a lease. Borrowers-turned-tenants will be able to sign leases
of up to 12 months and will pay market rents, which in most cases are lower
than the cost of mortgage payments."

Speculation Watch:

November 5 - Bloomberg (Emre Peker): "Cerberus Capital Management LP and Apollo
Management LP had the worst-performing leveraged buyouts among the largest
private-equity firms, according to Moody's... Buyout firms spent about $640
billion on 186 transactions before the credit crisis began in July and August
of 2007, Moody's analysts led by John Rogers...said... Of those deals, 67%
of Cerberus-sponsored companies and 65% of Apollo takeovers have defaulted
or become distressed. 'A lot of these firms have very unsustainable capital
structures,' Rogers said... There will be additional defaults, most likely
including currently distressed firms he said. 'We're not at the end game yet.
We're probably in the second half."

About a Half Paradigm

There were key developments this week providing added confirmation to my macro
thesis. First of all, this morning's dismal payroll data (10.2% unemployment!)
- after a year of unprecedented fiscal and monetary stimulus - confirm the
depth of structural impairment overhanging U.S. recovery. Our economy is badly
lagging the globe's rebound.

Over some months, I have worked to construct a framework for analyzing the
unfolding global reflation. I've been expecting this reflation to unfold with
altogether different dynamics than previous reflationary periods. After watching
developments, I am willing to go so far as to argue that we are witnessing
a historic Paradigm Shift. The most robust Credit dynamics have shifted from
the "Core" (U.S.) to the "Periphery" - with major ramifications. This atypical
global reflationary backdrop is dictated by the emergence of a Global Government
Finance Bubble and dynamics that support powerful financial flows to non-U.S.
markets and economies.

Previous bouts of reflation were powered primarily by Wall Street Credit
- specifically mortgage finance, securitizations and speculative leveraging.
From an economic perspective, U.S. housing, consumption and the Credit/asset-inflation/consumption-based
U.S. Bubble economy were at reflation's heated epicenter. From the perspective
of global speculative financial flows, dollar-denominated securities markets
were consistently and predictably the asset market demonstrating the most robust
inflationary biases (global financial players had to participate).

Like clockwork, systemic stress would eventually provoke the activist Federal
Reserve into slashing rates, inciting higher (dollar) securities prices, and
promoting speculative leveraging. This incredible mechanism would immediately
inject cheap liquidity directly into U.S. housing and, only somewhat delayed,
throughout the general economy. The vulnerable dollar persevered through the
generosity of global flows attracted to the inflationary biases percolating
throughout U.S. securities and asset markets (with the Fed and GSEs acting
as powerful market liquidity backstops).

The bursting of the Wall Street/mortgage finance/housing Bubbles forever
altered key dynamics. Importantly, the private-sector U.S. Credit system lost
its status as the epicenter of global Credit expansion and speculation. Wall
Street and U.S. mortgage finance "inflationary biases" were displaced - hence
the termination of their role as powerful monetary stimulus mechanisms.

Indeed, years of dollar debasement had come home to roost. Non-dollar (i.e.
global currencies, gold/precious metals, energy, commodities, China, India,
Asia, Brazil and the emerging markets) assets supplanted U.S. securities as
the asset class demonstrating the most enticing upward/inflationary bias. These
days, activist Fed monetary looseness lavishes liquidity first and foremost
out to the Periphery.

The front page of Wednesday's Financial Times included two notable headlines:
Next to "Buffett bets $26bn on US" was "India sells dollars for gold and lifts
bullion to high." I certainly view the Reserve Bank of India's purchase of
200 tons of bullion from the IMF as exemplifying the profound shift of financial
power from the Core to the Periphery - as well as the shift of "inflationary
biases" from dollar securities to "undollar" asset classes.

The Indians today enjoy the financial resources, and they are apparently
eager to trade dollar holdings for hard = non-dollar = assets. And as much
as the media trumpeted Mr. Buffett's railroad acquisition as a vote of confidence
for US recovery, there's surely more to his analysis. In the unfolding Paradigm
shift, the U.S. "services" economy will have no alternative than to adjust
to a more efficient goods-producing economic structure. Our troubled currency
will require that we produce more, consume less, survive on reduced amounts
of Credit - and we will have to do so in an energy-efficient manner. Within
such a backdrop, the railroad business would be relatively appealing when compared
to consumer-based businesses or U.S. financial assets more generally. I would
also view Mr. Buffett's aggressive move as supporting the thesis of hard assets
supplanting dollar securities as the preferred asset class.

Disappointingly, the Federal Reserve this week also confirmed my macro analysis.
The Bernanke Fed has now locked itself into a policy course that will ignore
global reflation dynamics and instead fixate on specific U.S. economic indicators.
Instead of adopting a more hawkish posture and laying the market groundwork
for withdrawing extraordinary monetary stimulus, the Fed flew even farther
into uncharted dovishness. This adds to a long series of (compounding) errors
from our central bank. Most importantly, the Federal Reserve signaled "resource
utilization" (markets read "unemployment rate") as a key factor that will determine
the course of policy normalization. If I had to choose one economic indicator
guaranteed to notably lag global reflationary dynamics, well, I'd bet on U.S.
payrolls.

So, from a macro perspective, a clearer view is coming into focus - a new
Paradigm is emerging. New global reflationary dynamics have gained important
momentum. Credit systems in China, India, Asia, Brazil and the developing world
- the "Periphery" - are today significantly more robust than they are here
at home (the "Core"). Powerful global financial flows to the inflating Periphery
("Monetary Processes") also work to ensure market and economic outperformance.
The rising Periphery - with its billions of consumers and rising demand for
commodities - has realized a robust and self-reinforcing inflationary bias.
Moreover, secular dollar weakness has increased the investment and speculative
merits of commodities and other hard assets when contrasted to dollar securities.
Dollar weakness begets global reflation that begets dollar underperformance
that begets a new Paradigm..

The balance of financial and economic power has shifted decisively away from
the U.S. The Periphery has supplanted the Core as the epicenter of global economic
reflation, recovery, and expansion. Yet the more the world changes the more
the Fed remains the same. Disregarding both the impaired dollar and global
reflationary dynamics, the Fed has locked itself into pegging rates based singularly
on dismal U.S. economic fundamentals. And these ultra-low Core rates are providing
a very hefty global interest-rate anchor.

I will humbly suggest that a momentous global economic transformation is
at this point About Half a Paradigm. Powerful global economic and inflationary
forces have decisively shifted to the Periphery. Meanwhile, the Federal Reserve
(Core) still retains remarkable dominance over global market yields. I believe
we are in a transition period, with the Fed's power over global yields waning
over time (or perhaps abruptly in a future crisis backdrop). In the meantime,
however, global yields are mismatched to the reflationary backdrop. This predicament
implies ongoing market distortions, a rather extraordinary global mispricing
of the cost of finance, along with all the myriad financial and economic costs
associated with unrelenting "Monetary Disorder" (i.e. assets Bubbles, imbalances,
mal- and over-investment, financial and economic fragilities, etc.)

Of late, there's some loud clamoring with respect to the dollar carry trade
and global asset Bubbles. Little doubt the "carry trade" (borrowing at low
rates in the U.S. to play higher-yielding assets globally) is a meaningful
source of global liquidity, although it should not be overstated in the context
of rapid synchronized Periphery Credit growth. And, clearly, speculative excess
has found its way to "developing markets" (some years ago I would write "liquidity
loves inflation" to describe how financial flows inherently gravitate toward
the inflating asset classes). But I would stress that a reasonable portion
of this year's spectacular market gains are associated with a fundamentally-based
revaluation of Periphery and commodity-based assets. There's more to this year's
global market moves than mindless buying of risk assets and Bubble excess.
Furthermore, I believe the Core-to-Periphery Dynamic is a secular trend that
will prove less vulnerable to bursting Bubbles than others would contend.

The sources of acute systemic fragility are generally not easily or commonly
recognized during periods of excess. The risks wrought from Fed-induced market
distortions and mis-pricings during the Mortgage Finance Bubble were not apparent
to most until it was much too late. The perception today is that our post-Bubble
systemic backdrop is not vulnerable to either excesses or inflationary pressures.
The bulls scoff at the notion that there are domestic risks associated with
sticking with ultra-easy monetary policy (any one catch Paul McCulley's CNBC
interview late this afternoon?). The risks are there but not so visible.

A major yet unappreciated domestic risk associated with Fed policy is that
ultra-low interest-rates are being only further embedded into Credit and economic
structures. The Fed has manipulated short-rates and market yields in the most
extreme degree. This intervention has amounted to massive distortion throughout
the markets, while this process has further spurred the Paradigm shift of power
from the Core to the Periphery.

Each month, the U.S. Credit system and economy become only more vulnerable
to a rise in yields (mortgage and Treasury borrowing costs, in particular).
Imagine the U.S. housing market in an environment of much higher mortgage rates
and then ponder the scope of the Fannie/Freddie/FHLB/FHA bailouts in the event
of a spike in yields. Picture the dilemma faced by Treasury if its borrowing
costs jump significantly. How about the fiscal position of state and local
governments? Could our frail banking system handle a surprise rise in rates?
And imagine the corner policymakers would find themselves boxed into when the
Fed loses control over market yields.

It is not clear to me whether it will unfold over months or years. But I
do expect a more complete Paradigm shift to foster waning influence of the
Fed over global market yields commensurate with fading U.S. economic dominance.
Unless global reflationary forces dissipate, this implies a future adjustment
period for U.S. interest-rate and risk asset markets. And when the Fed eventually
loses command over market yields, the risks associated with today's policy
course will likely manifest into a very problematic financial and economic
crisis. The Fed should neither peg interest rates nor telegraph the future
course of interest rate manipulations - especially at near zero rates. And
the Fed can today ignore global reflationary dynamics at our - and our currency's
- future peril. It's amazing the lessons somehow not learned.